You Have to Pay Someone To Buy Your Oil? Huh???
We took a step back last week, with markets down -1.3%, as we digested some grim economic numbers, 26 million unemployed over the past five weeks, and the price of oil went negative for the first time in history. To be fair it was the near term futures contract, but the message is clear. The world is awash in oil. It is caused by a combination of increased output and sharply declining demand which has led us to the point where we are producing a good deal more than we are using; in addition, our storage tanks are now near capacity. Thus we are at the point where you have to pay someone to take your oil.
This is an unsustainable situation. The drillers are busy scaling back production but evidently oil is not like a faucet and it takes time and money to lower production and thus moves slowly.
The implications of overstocked oil are double edged. Lower prices have generally been good for the US economy as oil and gas is only 8% of the US economy and most of the other 92% benefits from lower energy prices. The negative side is that if oil does not stage a sharp recovery, which is unlikely, we will seem mass bankruptcies and layoffs in an industry that employees approximately 10.5 million people.